High prices change face of gold buying

Like everyone else who deals in gold, jeweler William Houchin has found himself in a vortex of market forces he can't control.

"I hate it," Houchin said, standing at the counter of his tiny shop, Watch & Wares Estate Jewelry, in Orange. The long upward spiral of gold prices – the metal closed Wednesday at $1,655.50 an ounce – has provided a steady cash stream as customers have come into Houchin's store looking to sell their old necklaces, rings and bracelets. Houchin evaluates and buys the gold, often at prices that would have seemed absurd 10 years ago, and in turn re-sells it for a profit, usually to a refinery that melts it down.

But the 20-year-old boutique has lost a bit of its luster. The real inventory, the exquisite estate items that gleam in glass display cases, no longer moves the way it did; few clients can afford top-end gold jewelry. Houchin said he takes a huge risk if he commissions a custom-made piece without having a buyer already in hand.

For a man who was fascinated by his grandfather's pocket watch, and who retains an avid appreciation for the filigreed contours of a quality earring, the skewed realities of today's frenzy do not sit well. Untold millions of watches, cuff links, brooches, money clips and novelty items – some broken or old-fashioned, some in classic styles that will never be made again – are being flushed out of attics and drawers and shoeboxes and re-cast as gold bars, simply because the gold is worth more than the heirlooms.

"It's sad to see these pieces go away," said Houchin, who also laments the explosion of street-corner cash-for-gold outlets that have facilitated the rush. They are all his competitors. "The butcher, the baker, the candlestick maker – everybody's buying gold," he said, "because it's easy."

Gold parties were one of the first signs of the scramble. As the global financial crisis hit and investors abandoned stocks and commodities, gold prices leapt. After hovering between $300 and $400 an ounce for 20 years, gold spiked toward $1,000 an ounce, prompting enterprising individuals to organize meetings in their homes. These were much like Tupperware parties, except instead of purchasing resealable plastic containers the guests brought their old jewelry to sell.

Newly laid off from a bank job, Erin Stevenson held some of the first gold parties in Orange County, inspired by a television program featuring the founder of mygoldparty.com. Stevenson created a local affiliate, mygoldpartyca.com, in 2008, and staged dozens of parties a month. Typically, 10 to 20 guests would cash in $5,000 in jewelry, generating profits of $1,500 or more. Stevenson said she enlisted as many as 18 regular party hosts, who also got a cut.

"In 2009, I bought over $1 million worth of gold," she said. "It was crazy. It was fun to write people checks and make their day – and make their mortgage payments sometimes. It was very emotional." Some guests found it difficult to part with jewelry that had belonged to parents that were no longer living, or to ex-spouses. "You'd have people crying on your table."

Gold parties still take place – some gold dealers help willing hosts to organize them – but the scene has faded due to the intensifying money grab, Stevenson said. No one wants or needs to wait around for a party to cash in gold that is worth more than ever. Stevenson, who has gone back into banking, writing mortgage loans, now hosts maybe one party a month for old clients, she said.

Sellers now go to jewelry stores – virtually all of them now buy gold – and to cash-for-gold outlets that exist solely to buy the precious metal.

A buying frenzy

"Competition has heated up tremendously," said one of those cash-for-gold players, Parviz Firouzgar, a 50-year-old serial entrepreneur who was once, among other things, a radio talk-show host and, like Stevenson, a mortgage lender. His own mortgage company collapsed during the recession – causing Firouzgar to begin dabbling, four years ago, in selling gold by mail, a venture that took off. Today he and a partner, Stephen Kent, operate one of the region's biggest gold-cashing firms, AAA Gold Exchange, which now has 37 locations in California, Arizona and Hawaii, including a dozen in Orange County.

Few customers would confuse AAA Gold Exchange for a jewelry store. The Spartan interior of the company's shop in Garden Grove, where the trim, 50-year-old Firouzgar chatted one recent afternoon wearing a heavy gold neck chain, features several desks but no display cases. The company sells no merchandise to the public. Transactions are a one-way street, with the store purchasing gold that will be melted down. No jewelry is spared the furnace no matter how extraordinary it might look.

Firouzgar's company has two main competitors. The largest, Chicago-based GoldMax, has made an aggressive push, opening its first eight Southern California stores in 2010 and adding 50 more since then. There are now 15 in Orange County. Founders Scott Garber and Jason Sadoff have a veritable gold-buying empire, with more than 150 additional stores in nine other states and Robin Leach, the former host of television's "Lifestyles of the Rich and Famous," serving as a company spokesman in a nationwide marketing campaign.

Another company, The Gold Guys, founded in 2008 by friends Joe Beasy and Shane Maguire at Minnesota's Mall of America, has one store in Orange County, at the Brea Mall, but advertises heavily and generates substantial volume. Numerous other "mom-and-pop" buying outlets form a separate bloc of buying power.

"You're talking about hundreds of millions of dollars of gold that's being bought every year and taken out of the market just in Southern California," Firouzgar said.

The cash-for-gold realm is a nervous place. Dealers are keenly aware that, at some point, the rich vein of consumer gold will begin to tap out, especially if gold prices retrench. Every new gold-buying outlet that opens dilutes the revenues of existing locations. Suspicion and finger-pointing abound. A constant refrain is, "We pay top dollar for your gold – but watch out for the other guys."

Firouzgar, for example, who said he does much of his $170,000-a-month advertising on a Christian radio station, where integrity is paramount, talks of trying to maintain fairness in what is essentially a free-for-all scramble for a buck. "Most companies out there pay about 50 cents" on the dollar for gold, he said. "Companies that pay more than that have a high level of integrity," Firouzgar said. "We pay as high as 95 percent. That's not the average purchase, but we will go up to 95 percent."

Let the seller beware

Every deal, however, is subject to negotiation; the street market for gold is an eBay-esque realm where things tend to be worth only what a buyer will pay for them. Cash-for-gold outlets do not flourish and expand without angling for every edge. "Everyone out there is willing to pay an extra $20 just to take business away from a competitor," Firouzgar said. "If somebody has a 30 percent base payout, and they offer you an 'extra 50 percent,' you're still only getting 45 percent of the (gold's) value," he said. That "extra half" means half of the 30 percent, not half of the real value, he said. "This is where it gets very misleading."

Richard Baron, a former executive director of the National Association of Jewelry Appraisers, said most people who start gathering up old bracelets to cash in are unsophisticated about dealing in gold and are easily exploited.

"These gold-buying stores ... are notorious for quoting extremely low prices," he said. Not long ago, Baron said, he conducted a test by taking his own 14-carat gold ring, which features a one-carat center diamond and 60 points of smaller diamonds, to a GoldMax location. In addition to the diamonds, Baron estimated the value of the gold alone at $240. A clerk at Gold Max offered $86 for the ring, he said.

"Had I fallen for that," Baron said, "I would have sold an extremely valuable ring for a song."

GoldMax did not respond to repeated requests for an interview. It should be noted that Baron, 72, came out of semi-retirement to join the fray and is now a competitor of GoldMax and other cash-for-gold companies. With his gold rings, gold watch, gold neck chain and open-collared dress shirt and suspenders, Baron is a dapper CEO of Precious Metals Refinery Co. of Newport Beach and also owns a sister company named Equity Lenders, a pawn shop that makes loans on gold jewelry, diamonds, high-end watches and exotic cars.

Although he buys gold just as the street-corner cash-for-gold outlets do, Baron also is involved in the final step of the metal's life cycle: the melting process to remove and re-cast the gold into 24-carat bars. Some are bought by investors; most are resold back to the jewelry industry. Baron keeps an office near John Wayne Airport but does the refining at a facility he owns in Los Angeles and another he contracts with in Chicago.

"Sometimes you would cry if you saw what I melt," he said, remembering treasures that once inhabited the closets of coastal mansions. One client walked in with a shimmering solid-gold purse. Another bid goodbye to a gold comb-and-mirror set and several glass jars ornamented with gold lids and rims. "She left Precious Metals Refinery with a check in excess of $38,000," Baron said.

Dealers determine purity with an acid test. They rub a piece of jewelry across a polishing stone – a flat, sandpaper-like surface – scraping away just enough of the highly malleable gold to leave a visible line. One of gold's desirable characteristics is its resistance to corrosion – it is tougher to dissolve than the alloy metals, such as copper and nickel, that are used to harden it. By scraping a gold line and dabbing it with various strengths of acids, testers can see how much corrosive force is needed to dissolve the line and therefore discern whether the gold is 14-carat, 18-carat or something else.

Bogus gold and crime

Once gold is evaluated and weighed, dealers cut checks on the spot, a promise of fast, easy money that inevitably attracts an unsavory element. Firouzgar, the co-founder of AAA Gold Exchange, said that, despite careful testing at his stores, his employees have been duped time and again by crime rings passing off fake gold.

"We've bought well over $100,000 worth of forged items," he said, spreading across his desk a number of fraudulent hoops, or bangles, and a chain made of what appears to be white gold – except it is not. "It's made of alloys – the main one being chromium – that test like gold" when exposed to acid, he said. "Certain combinations of alloys test out very well."

Law-enforcement agencies say they have not detected a substantial rise in crime due to high gold prices, although in Santa Ana a number of women have been robbed of jewelry while walking alone after church, said Cpl. Anthony Bertagna of the Santa Ana Police Department. "Especially in the Hispanic culture, women wear gold," he said, noting that in one case gold jewelry was snatched from a mother and a small child in a stroller. A suspect was later arrested.

Only occasionally do the crimes make headlines. In Los Alamitos, a man with a phony gold bar and a sad story about his son needing medical care swindled a woman out of $1,200 in a supermarket parking lot. No one has been arrested in that case, which occurred two years ago, police say. This past September, in New York, a 10-ounce gold bar costing $18,000 was found to be fake – its insides had been bored out and packed with tungsten, a metal similar in weight to gold but worth scarcely $1 an ounce. A Beverly Hills man named William Scott Spalding was sentenced in October to 10 years in state prison after defrauding a Huntington Beach woman out of $280,000. She paid for gold that was never delivered.

"Crooks are crooks ... as soon as somebody invents a way to scam something, they're going to do it until they get caught," said Lt. Jeff Nightengale of the Garden Grove Police Department, which jailed a man suspected of passing off phony gold bangles at Firouzgar's store.

While police have found no persistent problems with local cash-for-gold outlets,investigators remain concerned because the stores are so loosely regulated, Nightengale said. Gold-buying operators must apply for a second-hand dealer's license, similar to a pawn license, which requires them to submit to a background check. They also must keep their transaction slips, recording the names and driver's license numbers of sellers, for at least a year, police say. Redeemed gold must be kept at least 30 days before it is melted.

But unlike pawn slips, records of gold transactions do not automatically pass on to law-enforcement agencies. The Orange County Sheriff's Department collects them for unincorporated areas, such as Mission Viejo, a licensing official said, but police detectives typically never see the slips unless property is reported stolen, police say.

"A pawn shop would be able to tell you, 'Joe Black, who lives at this particular address, pawned a 32-inch color television,'" Nightengale said. "It's not like that at all" with cash-for-gold stores. "If we do track something back to a particular place, more often than not they would say, 'We don't have any record of it.'"

Gold prices, like crime rates, tend to rise when the economy is bad, even though there is no direct correlation. Skittish investors sink money into the metal. That gives some players in the gold game a perverse sense of optimism.

"To me, the economic disaster is still looming," said Baron, the Newport Beach refinery owner, who figures business will be good for a long while. "Gold will continue to go up. It wouldn't surprise me to see it reach $2,000 (an ounce) in the next 24 months – maybe even higher."

Five tips for selling gold

Selling gold is risky, especially for the novice. Here are five tips to assure you get a fair price for your jewelry, watches and coins.

1. Know your merchandise. Pure gold is 24 carats. Jewelry is commonly 14-carat or 18-carat, and prices will vary by carat value as well as weight. Be aware that some items may be worth more as jewelry than as gold, especially vintage pieces carrying marquee names such as Cartier or Harry Winston. The same is true for high-end watches. If your merchandise has premium value as jewelry, you might receive top payment at a jewelry store rather than at a cash-for-gold outlet where it will be melted down.

2. Understand prices and the weighing process. Check the current price of gold, easily available at goldprice.org and other websites. While the per-ounce price is most often quoted, weighing typically involves finer units of measurement. There are 20 pennyweight to an ounce and about 30 grams to an ounce. Don't let a dealer weigh your gold on one scale and pay you on another. Similarly, Make sure 14-carat and 18-carat items are weighed separately. Dealers should be willing to test and weigh your merchandise in front of you.

3. Pick a reputable dealer. Check out dealers first or consider a trusted jeweler. Some are listed with the Better Business Bureau. Ask around, maybe you know friends who have had a positive – or negative – experience selling gold. Most gold dealers have their own websites. Look to see if they list prices. Reputable dealers will want to see a photo ID at the time of sale to guard against receiving stolen property. Bring one. Don't send gold by mail to companies that list only a post-office box. If you do send gold by mail, insure it.

4. Compare prices. Most dealers will give you a written estimate. Shop at several stores, especially if you have a significant amount of gold. A better price may be worth the travel time.

5. Negotiate. Remember, the first price you are quoted might be a low-ball offer. If in doubt, ask for more – and be willing to walk out.